China’s Influence in AIIB Lending: Unraveling the Nexus of Politics and the BRI

• In Event: Development and External Dependence

Abstract

Since the 2000s, China has been continuously attempting to expand its influence in the international community, powered by its economic growth. Especially, the Asian Infrastructure Investment Bank (AIIB) established in 2016 serves as a prime example of China's efforts to extend its impact. International institutions, particularly Multilateral Development Banks (MDBs) are often utilized as an instruments to advance major shareholder’s interests with a burden sharing. Considering China's significant influence within AIIB, there is a question about where China's preferences are directed in the AIIB lending. Which countries receive more AIIB loans, and which countries desire them more? Taking both the supply-side and demand-side of AIIB lending into account, I posit that the AIIB allocates more loans to countries with which China has less friendly relations. The supply side addresses China's preferences in allocating AIIB loans, while the demand side examines the incentives of recipient countries seeking loan from the AIIB. China is subject to international scrutiny as well as internal monitoring by democratic member states in the AIIB. In order to preserve the institution’s legitimacy, China is likely to seek improving relations with countries that are not yet familiar with it, rather than overtly using lending for its own interests. As a result, China tends to allocate more AIIB lending to countries with which it has a greater political distance, driven by both external and internal pressures. Additionally, from the demand-side perspective, countries already participating in the BRI may not actively seek multilateral aid with conditionality, as they are already receiving substantial investment through bilateral aid from China. Conversely, countries wary of China's deep influence and not involved in the BRI, are more likely to request lending projects from AIIB since it has more transparency in governance and rules than the BRI. I test my theoretical argument by utilizing the dataset collected from AIIB documents. This analysis examines the 92 AIIB member countries from 2016 when the AIIB began its operations until the most recent data available in 2022. The results indicate that countries with greater political distance from China receive more AIIB lending and projects. Furthermore, the results show that countries joining the BRI receive less AIIB lending and projects compared to those that are not. This article contributes by expanding the discussion on AIIB loan allocation beyond the supply-side focus of previous research. It also concentrates on the incentives of recipient countries to submit proposals for AIIB lending, providing a broader perspective on AIIB loan allocation. Furthermore, this paper adds value by empirically testing the hypothesis of China's use of AIIB as a means to restore relations, in contrast to theories that have suggested AIIB as an instrument for extension of BRI.

Author

• Hyerim Kim, Yonsei University